Absorption rate is a key real estate math number that you’ll often hear. In this post, we will discuss what the absorption rate means and and the real estate math behind its calculation.
What Absorption Rate Means
The absorption rate is a measure of how long it would take for a location to sell all of the homes it currently has on the market. It doesn’t take into account any new homes coming on the market in the future, but just asks “If I were to sell every home on the market today, how long would it take me?” It is used to determine if it is a buyer’s market, seller’s market, or balanced market.
Absorption rate is calculated in months and can generally be interpreted as follows:
- Less than 3 months: Seller’s Market
- 3-6 months: Balanced Market
- Greater than 6 months: Buyer’s Market
How to Calculate Absorption Rate
There are 3 steps to calculating the absorption rate:
- Determine number of homes sold in the last month
- Determine number of listings that are currently active
- Divide the # of active listings by the number sold last month
Green Hills County sold 400 homes last month and there are currently 3000 properties on the market. What is the absorption rate for Green Hills County?
The absorption rate would be 3000 / 400 = 7.5 months. Green Hills County is considered a buyer’s market.